View PDF

On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 ("the Act") which replaces the U.S. export tax regime with broad-based tax relief for domestic manufacturing, U.S. multinationals, S-Corporations and a wide variety of other businesses and industries.

Here's what you need to know right now about this important new legislation:

ETI REPEAL AND NEW MANUFACTURING ACTIVITY DEDUCTION
Repeal of exclusion for extraterritorial income (ETI).

At the heart of the Act is the repeal of the exclusion for extraterritorial income (ETI), an export break that the World Trade Organization ruled to be an illegal subsidy. Specifically, the Act repeals the ETI system of tax benefits for transactions after 2004, with transition relief for 2005 and 2006 and grandfather rules for contracts entered into before Sept. 18, 2003.

New deduction for U.S. production activities.
The Act replaces ETI with a new tax break for domestic production activities. The deduction is a percentage of the net income from those activities-3% in 2005- 2006, 6% for 2007-2009, 9% after 2009. (The 9% deduction percentage is intended to be equivalent to a 3% rate cut.)

The U.S. production activities deduction is allowed with respect to a taxpayer’s qualified production activities income, which is the taxpayer's domestic production gross receipts net of expenses. “Domestic production gross receipts” are receipts derived from any of the following:

Any lease, rental, license, sale, exchange, or other disposition of:

• ... qualifying production property (i.e., tangible personal property, any computer software, and certain sound recordings) that was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the U.S.;
  
  As well as:
  
• ... any qualified film produced by the taxpayer; or
• ... electricity, natural gas, and potable water produced by the taxpayer in the U.S.
• construction performed in the U.S.;
• or engineering and architectural services performed in the U.S. for construction projects in the U.S.

The deduction is available to all taxpayers with qualified production activities income. For pass-thru entities (such as S-corporations, partnerships, estates and trusts), the deduction generally is determined at the shareholder, partner or similar level by taking into account, at that level the proportional share of the qualified production activities income of the entity. The deduction is allowed for AMT purposes.

BUSINESS TAX INCENTIVES
In addition to the new deduction for U.S. production activities, the Act spreads billions of dollars of tax breaks throughout the business world.

Significant tax incentives include:

• Sec. 179 expensing - an extension of enhanced Code Sec. 179 expensing so that qualifying businesses can immediately expense over $100,000 (with indexing) of new investments through 2007. For example, in 2004, businesses can deduct $102,000 of qualifying property and $410,000 of property can be placed into service before the $102,000 deduction amount must be reduced.
• Start up expenses - Up to $5,000 in start up expenditures is deductible in the year a new trade or business begins. Additional expenses are amortized over 15 years.
• Qualified leasehold improvements - 15-year MACRS recovery period for qualified leasehold improvements placed in service after October 22, 2004 and before 2006.
• Qualified restaurant property - the depreciation period of qualified restaurant property is set at 15 years for property placed in service after October 22, 2004 and before 2006.
  
  S-CORPORATION REFORM
• The Act has provisions that make it easier for businesses to qualify and operate as S-Corporations, including raising the maximum number of shareholders from 75 to 100 and allowing family members to be counted as one shareholder.
  
  INTERNATIONAL TRANSACTIONS
• The Act includes several provisions to reduce double taxation of U.S.-based companies, including reducing the foreign tax credit (FTC) baskets from nine to two and allowing FTCs to be carried forward for 10 years instead of five.
• The Act repeals the 90-percent limitation on the use of FTCs against AMT.
• The Act encourages companies to reinvest foreign earnings in the U.S. by temporarily allowing an 85% dividends-received deduction on distributions from controlled foreign corporations (CFCs).
  
  INDIVIDUAL INCOME TAX PROVISIONS
• Deduction of state and local general sales taxes - In a move that will primarily benefit individuals in states with sales taxes but with no or limited individual income taxes (i.e., Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming), taxpayers, who itemize, will be able to deduct on their federal tax returns for 2004 and 2005 either what they pay in state and local income taxes or what they pay in sales taxes. Previously, only state and local income tax payments were deductible. Taxpayers who itemize may deduct their actual sales taxes or use IRS-published tables.
• Principal residence - a principal residence acquired in a like kind exchange must be held for at least five years in order for any gain on its sale to be excludable.
  
  OTHER MISCELLANEOUS TAX INCENTIVE PROVISIONS
  The Act also:
• Excludes from unrelated taxable income of tax-exempt investors gain or loss from the sale or exchange of a qualifying brownfield property and excepts such property from the debt-financed property rules.
• Allows an above-the-line deduction for attorney's fees and court costs incurred in connection with an unlawful discrimination claim.
• Expands the credit for electricity produced from renewable resources to include open-loop biomass, geothermal and solar energy, small irrigation power, landfill gas, trash combustion and refined coal production facilities.
• Allows the tax credits for alcohol fuels and the production of electricity to be applied against AMT.
• Provides a variety of tax breaks for farmers and other agricultural interests.
  
  REVENUE PROVISIONS - HOW WILL WE PAY FOR THE TAX CUTS?
  To pay for the benefits, the Act imposes a number of new costs on taxpayers.
  
  Charitable Organizations
• Donated vehicles - taxpayers must obtain a contemporaneous written acknowledgement for donations of qualified vehicles, including cars, boats and aircraft, that have a claimed value over $500.
  Exempt organizations can be penalized for failing to provide accurate receipts. Beginning in 2005, the deduction is limited to the gross proceeds received by the charity upon the resale of the property.
• Intellectual property - for patents and most other intellectual property donated to a charitable organization after June 3, 2004, the donor's deduction is limited to the lesser of the donor's basis in the property or its fair market value.
• Compensation and Pension Plans
  Non-qualified deferred compensation plans - requirements for nonqualified deferred compensation plans are consolidated and supplemented. Deferrals are included in the employee's gross income and additional tax is imposed as a result of certain plan features related to distributions, accelerated benefits and elections.
• ISO's and ESPP options - FICA wages do not include remuneration arising from the acquisition of stock under an incentive stock option (ISO) or employer stock purchase plan (ESPP) option, or from the disposition of such stock. Employers are not required to withhold federal income tax when an employee realizes gain on disqualifying disposition of stock acquired from ISOs and ESPPs. When federal conflict of interest rules require a shareholder to divest stock, the stock is treated as meeting the holding period requirements for ISO's and ESPP options.
  
  Other Miscellaneous Revenue Provisions
• Limiting the amount of the cost of an SUV that may be expensed in a single year from $100,000 to $25,000, effective for vehicles placed in service after October 22, 2004.
• Reducing tax avoidance through corporate inversions and individual expatriation.
• Shutting down abusive tax shelters.
• Closing various loopholes.
• Combating fuel tax evasion.
• Extending IRS user fees.

Please keep in mind that we have described only the highlights of the most important changes in the new law. Please contact your Amper tax advisor for more details on how you may be affected by this important tax legislation.